Enforcing Hard Budget Constraints Introduction The Problem: Bailouts and Soft Budget Constraints Two Types of Solution: –Markets and Hierarchies Three Key Institutions –Fiscal –Political –Financial Conclusions

Intergovernmental Fiscal Institutions Clarity in the Assignment of Revenue and Expenditure Authority Powers and Revenues that Match Responsibilities Intergovernmental Transfers –Levels of Transfer-Dependence –The Design of Transfer Programs Rules versus Discretion Marginal Incentives

Political Institutions Legislatures –Logrolling and Bargaining –The Organization of Political Parties Presidents The Problem of Federalism Delegation –Courts, Arbitrators, and Central Banks

Financial Institutions Government Transactions –The Central Government and its Agencies –Sub-national Banks –Local Public Enterprises Local Credit Markets Rules and Regulations Imposed by the Center Fiscal Responsibility Laws Guarding the Guardians: Delegation Revisited

Conclusions There is more than one way to achieve fiscal discipline. –Most countries can benefit from reforms aimed at strengthening market oversight These reforms should provide incentives for voters and creditors to oversee local decisions –At early stages of decentralization, however, markets may not be enough Improved central oversight need not undermine the growth of market discipline